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The Coming Euro Crack-Up
h/t InstapunditA spectre is haunting Europethe spectre of the disintegration of the eurozone. All the powers of old Europe have entered into a holy alliance to exorcize this spectre: German chancellor and French president, the Brussels eurocracy and the bonus-laden bankers. Let the ruling classes tremble. The debtors have nothing to lose but their burdens. So Karl Marx might have written were he watching unfolding events in the eurozone. In a sense, it is like watching a slow-motion train wreck. A quick review: Some 17 of the 27 nations that constitute the European Union have abandoned their own currencies in favor of the euro. This means they have given up control of their exchange rates and their interest rates, the latter set by the European Central Bank on a one-size-fits-all basis. In fact, it is the state of the German economy, the areas largest, that dictates interest rate policy for the entire 17-country group. When Germany was suffering under the weight of the costs of reunification, its sluggish economy needed, and got, a low-interest rate policy from the European Central Bank. That eventually proved too stimulative for, say, Ireland, which was in the midst of an inflating property bubble. The creation of the eurozone also led lenders to assume that the credit of every member was just about as good as the credit of Germany and France. So Greece, Portugal, Spain, and Italy could sell sovereign debt at very low interest rates and use the borrowed money to finance an expansion of their welfare statesGreeks, for instance, could retire at 50 if they were in a hazardous occupation such as hairdressing (all those chemicals). More important, countries like Portugal, with a poorly educated workforce, and Spain, with politically run regional banks making imprudent loans to local property developers, became noncompetitive with their eurozone colleagues and international rivals. No problem: Fiscal policy was not controlled from the center, and investors hadnt yet realized that lending to the so-called PIGS (Portugal, Ireland, Greece, and Spain) was a hazardous occupation. So the latter could tap the credit markets to fill the gap between tax receipts and spending, and benefit from German-level interest rates. Then the rating agencies rose from their torpor and downgraded the sovereign debt of Greece, helping to drive interest rates on its government bonds to unsustainable levels. Enter Brussels with a bailout for Greece. And when Irelands deficit soared to 32 percent after the government decided to guarantee the debts of its insolvent banks, enter Brussels with a bailout for Ireland. Now Portugal, burdened with an economy that has not grown for a decade, also is rattling its begging bowl, and another bailout is being negotiated with a conclusion along the lines of earlier bailouts imminent, never mind that the previous two have done more harm than an honest confession of insolvency would. If at first you dont succeed, repeat the mistake. ...To the intrinsic flaws in the euro systema one-size-fits-all interest rate and the inability of the eurozone bureaucracy to control the fiscal policies of membersadd the news from tiny, previously europhile Finland. In last months election, the anti-euro, anti-bailout True Finn partys share of votes jumped from 4 percent to 19 percent, and its parliamentary seats from 5 to 39 in a 200-seat parliament, enough to insist on inclusion in a coalition government. Just as the Tea Party sent a message politicians cant ignore, so the True Finns sent a message to the incoming government that it should think hard before casting a voteunanimity is requiredfor the impending Portuguese bailout. As Tony Barber put it in the Financial Times, Finns are angry because, like the Austrians, Dutch, and Germans, they dislike rushing to the aid of countries that in their eyes have cheated, idled, lied, lived beyond their means, and let reckless bankers run amok. Finlands no vote is all that is needed to leave Portugal drowning in debt. ...TheEuropean project wont go quietly into the night. But it just might go noisily into the ashcan of history... Posted by: g(r)omgoru 2011-05-09 |
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